German firms hold off UK investments ahead of Brexit talks

By Michael Nienaber and Paul Carrel

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By Michael Nienaber and Paul Carrel

BERLIN (Reuters) - Some German companies are holding off making investments in Britain until they know more about the relationship the country will forge with the rest of Europe following the Brexit vote.

While big companies like Siemens <SIEGn.DE> and Bosch have the deep pockets to take a longer-term view about one of Europe's most lucrative markets, and weather uncertainty about how the divorce will play out, smaller firms are more cautious.

Britain is a major market for Germany, accounting for around 7 percent of its exports, and is likely to remain so regardless of Brexit. But Germany's VDMA association, which represents thousands of firms in the engineering industry, said many of its members were unwilling to make any financial commitments.

"Companies want to continue to do good business in Britain and most are likely now waiting to see how the exit negotiations go, once they start," said its head Thilo Brodtmann.

Family-owned industrial manufacturer Kemper, for example, has shelved plans to expand its British business.

Before the Brexit vote the company, which makes air filter systems and fume extraction units for the car and construction industries, had planned to invest in its UK marketing and servicing operations this year.

"We definitely won't do that now," CEO Bjoern Kemper told Reuters from his office in Vreden, close to the Dutch border in the state of North Rhine-Westphalia.

He said Kemper's British sales have fallen this year, partly because customers had put off spending decisions ahead of the June 23 referendum, and that he saw little prospect of a rebound in the short term following the decision to leave the EU.

The company, which has overall annual turnover of about 40 million euros ($44 million), said it expects to lose around 1 million euros in UK sales this year as a result of economic uncertainty before and after the Brexit vote.

COMPLEX TALKS

Little is clear about how Brexit will affect the British and German economies.

The Bank of England said on Wednesday it saw "no clear evidence" that a sharp economic slowdown was yet under way in Britain after last month's vote, though there were signs investment and hiring were being put on hold.

New Prime Minister Theresa May says her government is formulating its position for talks that will determine the country's relationship with the EU, and has appealed for time to work out how best to approach the complex Brexit negotiations.

British officials have stressed they believe investment will flow again once foreign businesses can see how Britain's post-Brexit ties with the EU are starting to shape up.

"People are not disinvesting, they are just on hold ... if by December or March they can see a decent landing point, they'll move ahead again," one senior economic official told Reuters.

Kemper is more exposed to Britain than most German companies, with the country accounting for a tenth of its turnover, but its experience nonetheless reflects some of the challenges the Brexit vote poses to Germany's economy.

In the first five months of 2016, German exports to Britain stagnated on the year, official data shows. The slowdown contrasts sharply with last year, when German shipments to Britain surged almost 13 percent to just under 90 billion euros, a record for German exports to Britain.

In 2015, Germany sold more goods only to the United States and France.

The VDMA engineering association said German exports from the sector to Britain fell by 4.2 percent in the first quarter, year-on-year.

In a further sign that political uncertainty has harmed economic ties, German foreign direct investment to Britain fell 6 percent on the quarter in the first three months of 2016, Bundesbank data show.

Markus Kerber, managing director of the BDI Federation of German Industries, told Reuters it expected a significant deterioration in economic relations with Britain in the coming months. "When it comes to new German foreign direct investment, it's looking bad," he said.

MARKET ACCESS

The immediate uncertainty is perhaps less problematic for big companies whose size and financial muscle allows them to plan further ahead.

Siemens said late last month that it was not scaling back investment in a British wind power factory due to go into production in a few months.

German car parts maker Bosch [ROBG.UL], which employs 5,300 people in UK factories, told Reuters last week that it was sticking to its plans and intended to invest 20-25 million euros in Britain this year, about in line with last year.

Much of the negotiations between London and Brussels, when they come, are likely to boil down to a trade-off between Britain's controls on immigration and its access to the EU single market. Tougher immigration controls will likely mean less market access.

Reduced market access for Britain could be damaging for trade flows between Britain and the EU. However, some German companies could profit from such a scenario.

Stephan Gais, CEO of German firm Mahr, which makes high-end measuring tools used in the auto and chemicals sectors, said uncertainty caused by Brexit was hurting his business. But he also scented opportunity should trade between Britain and the EU become more complicated as a result of the divorce.

"There are a few British competitors and if they have difficulties in Europe that would of course help us."